Quanta Services (NYSE: PWR) is a U.S. corporation that provides outsourced construction, maintenance, and technology services for electric power, telecommunications, broadband cable, and gas pipeline industries. Capabilities include the planning, design, installation, maintenance and repair of most types of network infrastructure. In June 2009, Quanta Services was added to the S&P 500 index, replacing Ingersoll-Rand.[1]
Quanta Services employs about 8,000 people full time, 5,000 on a 1099 form and its operating companies achieved combined revenues of about $3.8 billion in 2008. It is headquartered in Houston, Texas.
This lawsuit challenges actions taken by a Special Committee of the board of defendant Quanta Services, Inc. (“Quanta”) in connection with a proxy contest initiated by plaintiff and insurgent shareholder Aquila, Inc. (“Aquila”). Aquila, formerly known as UtiliCorp United, Inc., is a Delaware corporation based in Kansas City, Missouri, and is a multi-national energy and energy services business. Quanta is a Delaware corporation based in Houston, Texas, that builds and repairs infrastructure for various utility companies, including Aquila. For all purposes relevant to this litigation, Quanta has effectively been managed by a seven-member Special Committee of its board of directors. The individuals named as defendants in this action-James R. Ball, John R. Colson, Vincent D. Foster, Louis C. Golm, Jerry J. Landgon, Garry A. Tucci, and John R. Wilson (collectively, the “Director Defendants”)-are all of the non-Aquila-affiliated members of Quanta's board and are the seven members of the Special Committee. Three of the seven Director Defendants are members of Quanta's management.1 On March 13, 2002, the Special Committee approved the creation of a Stock Employee Compensation Trust (“SECT”). The SECT is also a party to this lawsuit, as is its trustee, Wachovia Bank, N.A. (“Wachovia”).
On February 8, 2002, Aquila announced its intention to nominate an opposing slate of directors at Quanta's upcoming annual meeting. At that time, Aquila owned approximately 38% of Quanta's outstanding shares. In the following weeks, the Special Committee met several times to consider its strategy for the proxy contest, ultimately adopting the SECT on March 13. The SECT is a vehicle by which Quanta has designated eight million newly issued shares of common stock (representing approximately 10% of Quanta's outstanding shares before the adoption of the SECT) for the payment of benefits to its employees over the next 15 years. The terms of the SECT allow certain non-director employees of Quanta to vote these shares. The effects of this voting provision are to dilute Aquila's voting power and to increase Quanta management's chance of success in the proxy contest.
These negotiations were also unsuccessful and, on February 8, 2002, Aquila filed an amended Schedule 13D stating that Aquila had “advised Quanta that it intends to present an opposition slate of nominees for election as directors at Quanta's 2002 annual meeting of stockholders.” The Schedule 13D also noted that Aquila might cause Quanta to repurchase 20 to 25% of Quanta's shares, an action that would increase Aquila's ownership percentage without spending any of Aquila's money, and that Aquila would “support a broad-based retention program directed at Quanta's key employees, including certain executive management employees.” In a press release issued on February 10, 2002, Quanta announced its intent to “vigorously oppose” Aquila in the proxy contest.
The Special Committee next met telephonically on March 5, 2002, again with its advisors present. The purpose of the March 5 call was to update the Special Committee on several defensive actions that were being considered. The minutes show that the meeting began with a brief discussion of management's general concern about employee reaction to the proxy contest. The meeting then turned quickly to a presentation by Goldman and Wachtell about the SECT and about other possible employee retention measures. According to the minutes, this presentation and the ensuing discussion made little reference to the dilutive effect of the SECT other than noting in response to a question that “a legal challenge to the SECT was possible” for that reason. The handwritten notes, however, reveal that the Special Committee's advisors recommended that it “consider [a] series of steps to stabilize [the] employee situation [and] level [the] playing field a bit.” The notes then indicate that “courts will look at” the SECT and that the Special Committee “need[ed] to be sensitive to Del[aware] concerns.”
Quanta's performance continued to be strong in the second quarter, with revenue growth of 8.5% resulting from total revenues of $557.6 million. This compares to $514 million in the second quarter of 2006. For the six months ended June 30th, 2007, revenue growth was 12.1%, and revenues were $1.3 billion compared to $1.01 billion, in the first six months of 2006.
Before I delve into the specifics behind our results, however, I would like to update you on the progress of our acquisition of InfraSource Services. We have completed substantially all the customary regulatory processes, including receipt of early termination of the Hart Scott Rodino waiting period and approval from the applicable state public utility commissions. Our registration statement containing the joint proxy prospectus relating to the stockholder meetings for Quanta and InfraSource and the issuance of Quanta common stock in the merge was declared effective by the Securities Exchange Commission on July 26th, 2007 and we commenced mailing of the proxy materials to stockholders this week. We and InfraSource will hold our respective special stockholders' meetings on August 30th. The details of the meeting can be found in the joint proxy prospectus, posted on our Website at www.quantaservices.com in the investor section. With all of these items complete and assuming approval by the stockholders of Quanta and InfraSource and the satisfaction of the remaining customary closing conditions, we expect to complete the acquisition in the third quarter, as originally anticipated.
Over the past several months, our integration teams, in conjunction with our integration task force have been working diligently to map out the merger of the operational and corporate functions of both companies to identify synergies and leverage best practices. These efforts will streamline the integration process and ensure a smooth transition for customers, employees, and strategic partners alike. As we move forward, the benefits remain clear. The combined company will have the ability to offer an even more comprehensive portfolio of services to a larger customer base. From design and engineering to installation and maintenance, to energized services and emergency restoration, we continue to expect a business combination to create significant value over the long term, including synergy realization. I also believe employees realize the opportunities involved with being a part of a larger, more dynamic organization while customers will gain assess to new services and expanded personnel and equipment resources.
Reviewing Quanta's stand-alone results for the second quarter of 2007, revenues by type of customers were: 69% from electric and gas utilities compared to 66% in the second quarter of last year. 15% from telecommunications and broadband cable customers, compared to 17% in the same quarter last year, and 16% from ancillary services compared to 17% in the second quarter of '06. Our largest customer for the quarter made up only 5.5% of our revenues. Our top 10 customers for the quarter equaled 32.6% of our total revenues. And our top 20 customers made up approximately 46.9% of revenues. At the end of the second quarter 2007, our employee count was 11,713, down slightly from 11,804 at the end of the first quarter of this year, and up from 11,644 at the end of the second quarter of 2006.
Now, looking to our telecommunications and cable operations, for the second quarter of 2007, revenues from telecom and cable customers decreased 4.2%, compared to the second quarter of 2006. The majority of these revenues continue to be from customers on our outside plant and fiber expertise. Our wireless division experienced a revenue decline of approximately 35% in the quarter, and accounted for the vast majority of the decline in telecom revenues. However, backlog from our telecom and cable operations increased 22.6%, when compared to backlog as of June 30 of 2006.
Initiatives by telecom service providers to drive fiber closer to the home continue to have a positive impact on the performance of our telecom and cable operations. Although impacted by heavy rains in Texas and the Midwest, other areas such as California, Pennsylvania, Florida, Oregon, Washington and New York, showed increased activity. As of June 20, Verizon has secured more than 1 million FiOS Internet customers, and half a million FiOS TV subscribers, our work with Verizon spans not only path creation and fiber optic cable installation, but also residential installation for single and multifamily dwellings. AT&T remains on track to reach nearly 18 million households by the end of 2008 as part of its initial deployment of additional fiber, totaling 40,000 miles. By the end of 2007, AT&T expects to pass approximately 8 million living units. We have increased our support of the AT&T and New Verse initiative particularly in California and Texas.
New state franchise legislation continues to assist these FTTH initiatives. In the second quarter, Ohio, Nevada, Iowa, and Florida passed new franchise legislation that enables service providers to obtain a single license for the state. In all, 15 states have passed such legislation, equating to over half of the population of the country. The opportunities for our outside plant and services continue to expand. Municipalities continue to be more aggressive when seeking methods to employ fiber to their opportunities. For example, one of our operating units was awarded work in Tennessee for the installation of 120 miles of fiber. The work will begin this month and under the three-year contract, additional services, including the engineering, make-ready, cable splicing and service drop installation will be performed.
1. Appoint, compensate, retain and oversee the work of the Company’s independent auditors, considering qualifications, independence and performance and, where appropriate, replace the independent auditors. The independent auditors shall report directly to the Committee.
2. Review and pre-approve all audit and non-audit services performed by the independent auditors and determine whether the independent auditors’ performance of any non-audit services is compatible with the auditors’ independence. The Committee may delegate the authority to grant pre-approval of auditing or permitted non-audit services to one or more members of the Committee.
3. Review annually the services performed by the independent auditors to ensure that they are not performing the following non-audit services for the Company: (i) bookkeeping or other services related to the accounting records or financial statements; (ii) financial informationsystems design and implementation; (iii) appraisal or valuation services, fairness opinions, or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment advisor or investment banking services; or (viii) legal services and expert services unrelated to an audit.
4. Meet with the independent auditors and financial management of the Company to review the scope of the proposed audit for the current year and the audit procedures to be utilized and the fees and other compensation to be paid to the independent auditors therefor, and at the conclusion thereof review such audit, including any comments or recommendations of the independent auditors.
5. Review with the independent auditor the matters required to be discussed by Statement on Auditing Standards No. 61 relating to the conduct of the audit, including any audit problems or difficulties and management’s response.
6. Review and discuss with management and the independent auditor (i) management’s report on internal control over financial reporting and (ii) the independent auditor’s attestation of the Company’s internal control over financial reporting.
7. Review and discuss quarterly reports from the independent auditors on (i) all critical accounting policies and practices; (ii) all alternative treatments of financial information within generally accepted accounting principles (GAAP) that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditor; and (iii) other material written communications between the independent auditor and management including, but not limited to, the management letter and schedule of unadjusted differences.
Quanta Services employs about 8,000 people full time, 5,000 on a 1099 form and its operating companies achieved combined revenues of about $3.8 billion in 2008. It is headquartered in Houston, Texas.
This lawsuit challenges actions taken by a Special Committee of the board of defendant Quanta Services, Inc. (“Quanta”) in connection with a proxy contest initiated by plaintiff and insurgent shareholder Aquila, Inc. (“Aquila”). Aquila, formerly known as UtiliCorp United, Inc., is a Delaware corporation based in Kansas City, Missouri, and is a multi-national energy and energy services business. Quanta is a Delaware corporation based in Houston, Texas, that builds and repairs infrastructure for various utility companies, including Aquila. For all purposes relevant to this litigation, Quanta has effectively been managed by a seven-member Special Committee of its board of directors. The individuals named as defendants in this action-James R. Ball, John R. Colson, Vincent D. Foster, Louis C. Golm, Jerry J. Landgon, Garry A. Tucci, and John R. Wilson (collectively, the “Director Defendants”)-are all of the non-Aquila-affiliated members of Quanta's board and are the seven members of the Special Committee. Three of the seven Director Defendants are members of Quanta's management.1 On March 13, 2002, the Special Committee approved the creation of a Stock Employee Compensation Trust (“SECT”). The SECT is also a party to this lawsuit, as is its trustee, Wachovia Bank, N.A. (“Wachovia”).
On February 8, 2002, Aquila announced its intention to nominate an opposing slate of directors at Quanta's upcoming annual meeting. At that time, Aquila owned approximately 38% of Quanta's outstanding shares. In the following weeks, the Special Committee met several times to consider its strategy for the proxy contest, ultimately adopting the SECT on March 13. The SECT is a vehicle by which Quanta has designated eight million newly issued shares of common stock (representing approximately 10% of Quanta's outstanding shares before the adoption of the SECT) for the payment of benefits to its employees over the next 15 years. The terms of the SECT allow certain non-director employees of Quanta to vote these shares. The effects of this voting provision are to dilute Aquila's voting power and to increase Quanta management's chance of success in the proxy contest.
These negotiations were also unsuccessful and, on February 8, 2002, Aquila filed an amended Schedule 13D stating that Aquila had “advised Quanta that it intends to present an opposition slate of nominees for election as directors at Quanta's 2002 annual meeting of stockholders.” The Schedule 13D also noted that Aquila might cause Quanta to repurchase 20 to 25% of Quanta's shares, an action that would increase Aquila's ownership percentage without spending any of Aquila's money, and that Aquila would “support a broad-based retention program directed at Quanta's key employees, including certain executive management employees.” In a press release issued on February 10, 2002, Quanta announced its intent to “vigorously oppose” Aquila in the proxy contest.
The Special Committee next met telephonically on March 5, 2002, again with its advisors present. The purpose of the March 5 call was to update the Special Committee on several defensive actions that were being considered. The minutes show that the meeting began with a brief discussion of management's general concern about employee reaction to the proxy contest. The meeting then turned quickly to a presentation by Goldman and Wachtell about the SECT and about other possible employee retention measures. According to the minutes, this presentation and the ensuing discussion made little reference to the dilutive effect of the SECT other than noting in response to a question that “a legal challenge to the SECT was possible” for that reason. The handwritten notes, however, reveal that the Special Committee's advisors recommended that it “consider [a] series of steps to stabilize [the] employee situation [and] level [the] playing field a bit.” The notes then indicate that “courts will look at” the SECT and that the Special Committee “need[ed] to be sensitive to Del[aware] concerns.”
Quanta's performance continued to be strong in the second quarter, with revenue growth of 8.5% resulting from total revenues of $557.6 million. This compares to $514 million in the second quarter of 2006. For the six months ended June 30th, 2007, revenue growth was 12.1%, and revenues were $1.3 billion compared to $1.01 billion, in the first six months of 2006.
Before I delve into the specifics behind our results, however, I would like to update you on the progress of our acquisition of InfraSource Services. We have completed substantially all the customary regulatory processes, including receipt of early termination of the Hart Scott Rodino waiting period and approval from the applicable state public utility commissions. Our registration statement containing the joint proxy prospectus relating to the stockholder meetings for Quanta and InfraSource and the issuance of Quanta common stock in the merge was declared effective by the Securities Exchange Commission on July 26th, 2007 and we commenced mailing of the proxy materials to stockholders this week. We and InfraSource will hold our respective special stockholders' meetings on August 30th. The details of the meeting can be found in the joint proxy prospectus, posted on our Website at www.quantaservices.com in the investor section. With all of these items complete and assuming approval by the stockholders of Quanta and InfraSource and the satisfaction of the remaining customary closing conditions, we expect to complete the acquisition in the third quarter, as originally anticipated.
Over the past several months, our integration teams, in conjunction with our integration task force have been working diligently to map out the merger of the operational and corporate functions of both companies to identify synergies and leverage best practices. These efforts will streamline the integration process and ensure a smooth transition for customers, employees, and strategic partners alike. As we move forward, the benefits remain clear. The combined company will have the ability to offer an even more comprehensive portfolio of services to a larger customer base. From design and engineering to installation and maintenance, to energized services and emergency restoration, we continue to expect a business combination to create significant value over the long term, including synergy realization. I also believe employees realize the opportunities involved with being a part of a larger, more dynamic organization while customers will gain assess to new services and expanded personnel and equipment resources.
Reviewing Quanta's stand-alone results for the second quarter of 2007, revenues by type of customers were: 69% from electric and gas utilities compared to 66% in the second quarter of last year. 15% from telecommunications and broadband cable customers, compared to 17% in the same quarter last year, and 16% from ancillary services compared to 17% in the second quarter of '06. Our largest customer for the quarter made up only 5.5% of our revenues. Our top 10 customers for the quarter equaled 32.6% of our total revenues. And our top 20 customers made up approximately 46.9% of revenues. At the end of the second quarter 2007, our employee count was 11,713, down slightly from 11,804 at the end of the first quarter of this year, and up from 11,644 at the end of the second quarter of 2006.
Now, looking to our telecommunications and cable operations, for the second quarter of 2007, revenues from telecom and cable customers decreased 4.2%, compared to the second quarter of 2006. The majority of these revenues continue to be from customers on our outside plant and fiber expertise. Our wireless division experienced a revenue decline of approximately 35% in the quarter, and accounted for the vast majority of the decline in telecom revenues. However, backlog from our telecom and cable operations increased 22.6%, when compared to backlog as of June 30 of 2006.
Initiatives by telecom service providers to drive fiber closer to the home continue to have a positive impact on the performance of our telecom and cable operations. Although impacted by heavy rains in Texas and the Midwest, other areas such as California, Pennsylvania, Florida, Oregon, Washington and New York, showed increased activity. As of June 20, Verizon has secured more than 1 million FiOS Internet customers, and half a million FiOS TV subscribers, our work with Verizon spans not only path creation and fiber optic cable installation, but also residential installation for single and multifamily dwellings. AT&T remains on track to reach nearly 18 million households by the end of 2008 as part of its initial deployment of additional fiber, totaling 40,000 miles. By the end of 2007, AT&T expects to pass approximately 8 million living units. We have increased our support of the AT&T and New Verse initiative particularly in California and Texas.
New state franchise legislation continues to assist these FTTH initiatives. In the second quarter, Ohio, Nevada, Iowa, and Florida passed new franchise legislation that enables service providers to obtain a single license for the state. In all, 15 states have passed such legislation, equating to over half of the population of the country. The opportunities for our outside plant and services continue to expand. Municipalities continue to be more aggressive when seeking methods to employ fiber to their opportunities. For example, one of our operating units was awarded work in Tennessee for the installation of 120 miles of fiber. The work will begin this month and under the three-year contract, additional services, including the engineering, make-ready, cable splicing and service drop installation will be performed.
1. Appoint, compensate, retain and oversee the work of the Company’s independent auditors, considering qualifications, independence and performance and, where appropriate, replace the independent auditors. The independent auditors shall report directly to the Committee.
2. Review and pre-approve all audit and non-audit services performed by the independent auditors and determine whether the independent auditors’ performance of any non-audit services is compatible with the auditors’ independence. The Committee may delegate the authority to grant pre-approval of auditing or permitted non-audit services to one or more members of the Committee.
3. Review annually the services performed by the independent auditors to ensure that they are not performing the following non-audit services for the Company: (i) bookkeeping or other services related to the accounting records or financial statements; (ii) financial informationsystems design and implementation; (iii) appraisal or valuation services, fairness opinions, or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment advisor or investment banking services; or (viii) legal services and expert services unrelated to an audit.
4. Meet with the independent auditors and financial management of the Company to review the scope of the proposed audit for the current year and the audit procedures to be utilized and the fees and other compensation to be paid to the independent auditors therefor, and at the conclusion thereof review such audit, including any comments or recommendations of the independent auditors.
5. Review with the independent auditor the matters required to be discussed by Statement on Auditing Standards No. 61 relating to the conduct of the audit, including any audit problems or difficulties and management’s response.
6. Review and discuss with management and the independent auditor (i) management’s report on internal control over financial reporting and (ii) the independent auditor’s attestation of the Company’s internal control over financial reporting.
7. Review and discuss quarterly reports from the independent auditors on (i) all critical accounting policies and practices; (ii) all alternative treatments of financial information within generally accepted accounting principles (GAAP) that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditor; and (iii) other material written communications between the independent auditor and management including, but not limited to, the management letter and schedule of unadjusted differences.